Can China Create Global Companies?
November 1 2005 by Oded Shenkar
The acquisition of IBM’s personal computer division by China’s Lenovo and the aborted bids for Maytag and Unocal have heralded the arrival of a new player on the global business scene-the Chinese multinational enterprise. To be sure, these highly publicized moves are not entirely new. China’s TCL gained majority control over Thomson’s TV business, Nanjing Auto acquired the remnants of the MG Rover Group (the last British car maker), and auto component maker Wanxiang has acquired a number of small Midwest competitors, among many other examples. Other Chinese firms, such as telecommunications equipment maker Huawei Technologies, have been expanding briskly.
To put things in perspective, Chinese investment abroad still represents a small fraction of the massive flow of foreign investment into China. Nor are Chinese companies established juggernauts. Virtually all are followers rather than leaders in their fields and remain years behind their global competitors in key capabilities.
Still, the ascendance of Chinese firms represents a fundamental change in the global competitive landscape that once was the exclusive domain of multinationals from Europe, the United States and Japan. In recent years, South Korean and Taiwanese companies have joined the ranks of the world’s top 100 multinationals, creating a new type of multinational with different capabilities, strategies and modes of operation. Chinese multinationals will take a page from their book, but because of the institutional context and size of their domestic base, they are likely to take a different direction and present new challenges for their competitors.
But are the Chinese ready for primetime? Can companies that have thrived at home with the help of a web of political connections and subsidies play on the same playing field with global enterprises that have been around for decades, sometimes centuries, and have honed their skills in brutalcompetition? There is no question that aspiring Chinese multinationals suffer from many weaknesses, including blurred governance and relative ignorance about global consumers. The Chinese have virtually no capability in mergers and acquisitions. They have no experience even in
the simpler, domestic variety.
In addition, China suffers from very weak innovation capabilities, low R&D expenditures and an educational system that rewards memorization rather than creativity. It has failed in its attempts to generate innovation by decree. I am often amused by Chinese executives who, in the course of a presentation on innovation, demand a detailed recipe of precisely how to go about innovating.
However, the Chinese are taking major steps to remedy the situation. They’re reforming education, encouraging the repatriation of those educated abroad and pressuring foreign investors to transfer technology. In the meantime, they catch up on the cheap by disregarding intellectual property rights and by seeking acquisitions of those who have already learned to innovate.
If successful in attempts to develop their acquisition capabilities, Chinese players will quickly gain new technologies, enhanced capabilities, and brands and reputation that in the past have taken ages to develop. If they fail, and many will, they will go back to the drawing board and develop organically over time-but not that long a time.
Make no mistake about it: The Chinese are serious about catching up and are putting unprecedented resources behind this goal. Chief executives who underestimate the ability of Chinese enterprises to become viable competitors do so at their own peril. Be ready to face a new corporate species, one that often has access to cheap capital and the full range of resources of the state, one that has the cheapest human resources on the planet, one that is willing to do business in the most forsaken nations and under the most brutal regimes (e.g., Zimbabwe), and one that disregards intellectual property rights but, unlike other violators, has the capability to not only copy but also adapt and improve. Many global CEOs have not yet faced up to this new reality, let alone develop strategies for dealing with it. It is high time to do so.
Oded Shenkar is a professor at Ohio State
University and author of The Chinese Century
(Wharton School Publishing, 2004).